A 529 Plan Isn’t the Only Way to Save for College
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Here's your Money Briefing for Thursday, May 8th. I'm Julia Carpenter for The Wall Street Journal. Parents agonize about when and how much to start saving for their child's education.

A lot of families turn to 529 plans for help, but some parents say they prefer alternative savings vehicles. These UGMA or UTMA accounts allow you greater flexibility. They're not restricted for education. You can use them for whatever you want them for. There also can be some kiddie tax benefits.

So how should a parent, grandparent, or guardian weigh these options? Wall Street Journal contributor Cheryl Winokur-Monk joins me to talk through the pros and cons of these different ways of funding your child's education. That's after the break.

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There are a lot of tax benefits to 529 plans, the college savings plans that allow tax-deferred growth and tax-free withdrawals for qualified education expenses. But some parents say these plans don't suit their needs, and they're looking for alternatives. WSJ contributor Cheryl Winokur-Monk joins me.

Cheryl, so many parents I know are big fans of the 529 plan. What would prompt someone to look into alternatives? Of all the options that are out there, financial advisors really do like the 529 best. But some parents are reticent to use them.

So when your child is born or young, you don't know if he or she is going to go to a state school, the most expensive private school in the US, or even go to college outside the country, or you don't even know if the child is going to go to college. So some parents are hesitant to put money into a 529 because they're afraid it will be locked up in the account.

So even though you can transfer the funds to another beneficiary and Congress has sweetened the deal for 529s by allowing these funds to be used for K-12 tuition and some leftover funds to be reallocated to a Roth IRA, but there's no 100% solution. It's the lockup problem that they're really concerned about. And you walk us through several different options in your story, which is linked in our show notes. What are some of the pros and cons to these plans?

One of the first options is taxable brokerage accounts, and they offer a lot of flexibility. You don't have a contribution limit. The money doesn't have to be spent on qualified education expenses. And so if you don't use it for college, you can use it for anything. You could use it for education. You could use it for a new car. You could use it for a swing set. Like, really, like anything you wanted to buy with it. And Roth IRAs, you report, offer a pretty good deal on withdrawals. You can withdraw contributions at any age without tax or penalty.

What are the advantages and disadvantages to using a Roth IRA to pay for a child's education? So you have to have earned income to contribute to a Roth IRA. So contributions, not earnings, can be withdrawn at any time before age 59 and a half without taxes or a penalty. And so you can use those funds to supplement college savings and you don't have to dip into your investment earnings.

Your story also mentions UGMA or UTMA accounts, and these are also known as Uniform Gifts to Minors and Uniform Transfers to Minors Act accounts. Unlike 529 plans, these funds aren't limited to education expenses, so why would that appeal to a parent or a guardian?

Well, if the reason that people aren't putting money in the 529 is because of the lack of flexibility, these UGMA or UTMA accounts allow you greater flexibility. They're not restricted for education. You can use them for whatever you want them for. There also can be some kiddie tax benefits. It stipulates how investment and...

unearned income are treated for minors or full-time students under a certain age. But the problem is when the child becomes the age of majority, which is different ages in different states, the child gains control of the asset. So if you've put in $200,000, now you've got your child who's no longer the minor owns this account and has access to those funds.

So you may not want that, whereas in a taxable brokerage account, you're controlling those assets that the child is not. And you also reported there could be an impact on financial aid, right, if you're applying to scholarships or financial aid from a university. That's true. These types of accounts have one of the highest impacts, actually, on financial aid because they count as student assets for federal financial aid purposes.

And the last strategy you mentioned in your story was something totally new to me. People who take out whole life insurance and then borrow from the cash value that accumulates. Why would someone consider going this route? Anytime you even mention life insurance, it's a touchy subject because it's often more expensive than other options. And advisors typically don't turn to this option first. That said, it can be an option for some families.

So the idea is that you buy whole life insurance and you borrow from the cash value, as you were saying, and there's flexibility because you can use the funds to pay for college if you want, or you can use it for another purpose, or you can leave the funds untouched and then your heirs will get the full death benefit.

What are some of the disadvantages to this life insurance strategy? You're going to have to start pretty young so the cash value grows enough to use for college. You're not going to start it when your children are 15. You're going to start from the time they're born type of thing. Also, life insurance premiums are expensive.

often more expensive than just buying mutual funds or exchange traded funds in a taxable brokerage account. So that isn't a consideration. It's also a long-term commitment. That's the other potential disadvantage. So you can't just say, oh, I'm going to start funding this and then, ah, I'm just going to take a year off. I'm not going to pay the premiums. You'll end up short and the policy could lapse and then you're not serving the purpose that you want it to.

And a parent doesn't have to pick one plan and be married to it for forever, right? This doesn't have to be an all-or-nothing thing. And so even if a parent is concerned or a grandparent is concerned about putting a lot of money in a 529, you can still put some money in a fine and then use one of these other options along with it. So it doesn't have to be an all-or-nothing strategy. You can make your own strategy. Exactly. Exactly.

That's WSJ contributor Cheryl Winokur-Munk. And that's it for your Money Briefing. This episode was produced by Zoe Kolkin with supervising producer Melanie Roy. I'm Julia Carpenter for The Wall Street Journal. Thanks for listening.